Although you might think that your car loan has a set repayment schedule every month, you’d be surprised to know that there is often more flexibility than you might have assumed. A big part of this is to cater to the financial circumstances of each individual, where for some people they have the means to make payments more frequently.
In these instances, you might opt to make repayments towards your car loan on a weekly or fortnightly basis. This could help you save a small fortune on interest costs, however, some lenders may not necessarily allow you to take up this option, or will charge you for the ‘privilege’ of doing so. Regardless, it is important that you choose a repayment schedule which aligns with your best interests.
How can frequent repayments help me?
Making frequent repayments towards your car loan reduces the balance more regularly. While the size of the payments are smaller, to reflect the corresponding portion of what would have been a monthly instalment, they have the potential to lower total interest costs across the life of the loan.
This is because of the way interest on the loan balance is calculated. Even though interest rates are advertised on an annual basis, interest costs are calculated each day based on the loan balance at that point in time. As such, if you are reducing the loan balance more regularly, the effects of compounding will help you reduce interest costs between each subsequent repayment.
Like we mentioned earlier, some lenders will impose a fee on weekly or fortnightly repayments. This offsets the loss in interest that they otherwise would have claimed through higher monthly repayments. If your financier charges a fee, make sure that it does not outweigh the potential interest cost savings you stand to gain, otherwise it would defeat the purpose of making payments more regularly.
Getting ahead on your repayment schedule
If you’ve managed to build up a somewhat ‘comfortable’ financial position, you may be considering getting ahead on your repayment schedule by making larger payments than you are required to make. You’d be able to reduce your loan balance faster, in turn cutting interest costs further. This sounds great, right? Well, hold up just a minute.
As wonderful as this would be, there are a couple considerations to take into account. First, as enticing as this prospect might be, it’s not for everyone. You need to be sure that you are not straining your cash flow, or putting yourself in a potentially tight spot. Secondly, it is quite common for lenders to charge a fee for what they like to call ‘early payment’. Once again, you’ll need to make sure this decision stacks up economically.
As much as anything, meeting your repayment obligations is arguably the most important thing. If it makes sense, and you are in a position to do so, frequent repayments can help you reduce interest costs, but if in doubt, speak to your accountant first.
The Fincar team is here to help you with all your financing needs. Contact us today to help arrange your next car or equipment loan.